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SEMICONDUCTORS & THE WTO

How the World Trade Organization Has Supported Semiconductor Growth & Innovation

NOVEMBER 2020

25 The WTO at

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The steady opening of markets and leveling of the global

playing field spearheaded by the World Trade

Organization (WTO) over the past 25 years has been

critical to the success of the global semiconductor

industry. Semiconductors – the brains of all modern

electronics – are a highly traded product with an incredibly

complex production process and supplier ecosystem that

spans multiple countries. In 2019, more than 1 trillion

semiconductors were sold worldwide, accounting for

$1.65 trillion in total global trade.1 Given the sheer volume

and complexity of global semiconductor trade, along with

high capital costs and short product life-cycles, the ability

to move semiconductor goods and materials freely, fairly

and efficiently across borders has been critical to the

industry’s success and technological progress. Over the

past 25 years, the WTO has helped make this progress

possible by opening markets and implementing uniform

rules of trade. Landmark WTO agreements like the

Information Technology Agreement (ITA) and ITA

Expansion, Trade-Related Aspects of Intellectual Property

Rights (TRIPS), and the Trade Facilitation Agreement

(TFA) have drastically reduced the cost of trade, lowered

consumer prices, and expanded access to productivity-

enhancing tech products to people around the world.

Global sales and the increasingly free flow of goods, ideas,

materials and people have in turn spurred technological

progress and innovation in a virtuous circle of innovation

This paper examines how WTO agreements related to

intellectual property protection, reciprocal tariff

elimination, disciplines on trade-distorting subsidies, and

trade facilitation have benefited the semiconductor

industry over the past 25 years. It also examines how

further reforms and stronger trade rules that remove

market barriers, promote fair competition, and protect IP

will enhance those benefits, not just for the semiconductor

industry, but for the broader global economy.

1 UN Comtrade (excluding LED) 2 SIA Factbook (2020)

FREE & OPEN ACCESS TO GLOBAL MARKETS HAS BEEN CRITICAL

TO SEMICONDUCTOR INDUSTRY SUCCESS & TECHNOLOGY

ADVANCEMENT

GLOBAL MARKET ACCESS SUPPORTS A

VIRTUOUS CYCLE OF INNOVATION

The U.S. semiconductor industry has benefited

from a virtuous circle of innovation; sales

leadership enables the U.S. industry to invest

more into R&D which in turn helps ensure

continued U.S. sales leadership. Scale and R&D

intensity underpin this circle, both of which

depend on global market access. While U.S.

companies maintain nearly half of their

manufacturing capacity in the United States, 82

percent of their sales are to overseas customers,

making semiconductors America’s 5th largest

export and a critical sector in which the U.S.

maintains a sizable trade surplus, reaching $8.5

billion in 2019.2 Global product revenues allow

U.S. industry to achieve the scale needed to fund

very large R&D investments that consistently

maintain U.S. technology ahead of global

competitors. Global market access also allows

industry to tap into highly specialized

resources, inputs and human talent to maintain

technology leadership.

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The 1995 WTO Agreement on Trade-Related Aspects of Intellectual Property

Rights (TRIPS) is the world’s first international trade agreement to both define

multilateral IP rules and standards and mandate minimum national IP

enforcement procedures within a single framework.2 Crucially, it made intellectual

property protection subject to WTO dispute settlement and potential trade

sanctions in case of noncompliance. The global legal framework it established for

protection of intellectual property has allowed innovative firms in IP-intensive

industries, including the semiconductor industry, to establish new business models centered around

licensing and contract manufacturing, and also maintain a competitive edge in research and

development. For this reason alone, the TRIPS Agreement was a major win for countries at the forefront

of developing valuable intellectual property, as well as for consumers around the world who benefit from

the end-products of these technological advances.

Strong IP protection and

enforcement are an essential

foundation to continued

technological progress and the

future competitiveness of the

global semiconductor industry,

as it incentivizes companies and

research institutions to invest in

R&D and share technology

without compromising their

returns on investment.

Semiconductor companies

typically spend 15-20 percent of revenue on research and development (R&D), making intellectual

property protection and enforcement of utmost importance to the U.S. semiconductor industry. In 2019,

semiconductor companies in the United States invested nearly $40 billion in R&D, or 18 percent of their

total revenue, one of the highest rates of any industry.3 Additionally, among the top 15 U.S. corporate

patent recipients, eight are companies in the semiconductor industry. 4 More generally, IP-intensive

industries, such as semiconductors, are estimated to contribute to more than a third of the U.S. GDP, and

around 27.9 million U.S. jobs.5 Such high rates of R&D investment in the semiconductor industry would

not be possible without the global IP protections and enforcement standards established by TRIPS. While

the TRIPS agreement covers a broad range of IP trade disciplines, there are three areas of critical

importance to the semiconductor industry: 1) protection for trade secrets, 2) express protections for IC

layout designs, 3) safeguards against compulsory licensing for semiconductors.

2 Uruguay Round Agreements. WTO Legal Texts. (Available at: https://www.wto.org/english/docs_e/legal_e/legal_e.htm#TRIPs) 3 Strengthening the U.S. Semiconductor Industrial Base. SIA, 2020. (Available at: https://www.semiconductors.org/wp-content/uploads/2020/06/Strengthening-the-US-Semiconductor-Industrial-Base.pdf) 4 Top 300 Organizations Granted U.S. Patents in 2018. Intellectual Property Owners Association, 2019. (Available at: https://ipo.org/wp-content/uploads/2019/07/2018-Top-300-Final.pdf) 5 Intellectual Property and the U.S. Economy. U.S. Patent and Trademark Office, 2016. (Available at: https://www.uspto.gov/sites/default/files/documents/IPandtheUSEconomySept2016.pdf)

I. TRIPS LAID THE FOUNDATION OF IP PROTECTION FOR GLOBAL SEMICONDUCTOR INNOVATORS

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TRIPS is the first multilateral trade agreement to expressly recognize trade secrets

as a form of IP and obliges members to provide a means for protecting information

that is secret.6 This is extremely important to the semiconductor industry, for which

trade secrets are a critical and major business asset. Some studies estimate for

highly innovative and knowledge-intensive industries like the semiconductor

industry, trade secrets can comprise up to 80 percent of the value of a company’s IP

portfolio. 7 Semiconductor trade secrets include manufacturing processes and techniques, chemical

formulations, circuit designs, software source code, business strategies and customer lists. 8 This form of

IP is often more valuable to a semiconductor company than patented legal protections due to the short

life-cycle of products owing to the rapid pace of technological development and upgrades. Ultimately,

protecting unregistered trade secrets is critical to companies’ business models because patented legal

protections quickly become obsolete due to rapid advances in semiconductor technologies. The value of

the trade secret protections under TRIPS is all the more important for small and medium sized

enterprises (SMEs) and start-ups, who often cannot afford teams of patent attorneys. Unfortunately,

while a company’s trade secrets are often its most valuable assets, they are also the most vulnerable.

“The entire economic value of a trade secret stems from the competitive advantage conferred by the

confidential nature of the information.”9 Once stolen, a company may lose its competitive advantage and

its market share could be jeopardized.

While TRIPS is important in establishing WTO Members’ minimum obligations for protecting trade

secrets, more needs to be done to protect this valuable form of IP, which is facing increasing and rampant

misappropriation by sophisticated actors, including by cyber means.

Article 35 of the TRIPS Agreement provides unique IP protection for the layout designs

of integrated circuits. 10 A semiconductor layout design (also referred to as a

“maskwork”) is the digital topography of the transistors and other circuitry elements on

a chip. Prior to 1984, these designs fell through the cracks of existing copyright and

patent regimes, and it was not necessarily illegal for a company to produce a competing

chip with an identical layout to its competitor’s chip. This led to concerns over “chip piracy,” in which a

company could copy a chip design for $10,000 that had cost its original manufacturer $100,000 by simply

taking negatives of the mask design. The United States was the first nation to pass a law protecting

6 TRIPS Article 39 calls on members to provide for the protection of “undisclosed information” that is secret and has commercial value, and to protect such information from disclosure, acquisition or use in a manner contrary to “honest commercial practices.” 7 The Value of Corporate Secrets: How Compliance and Collaboration Affect Enterprise Perceptions of Risk. Forrester Consulting, 2010. 8 Letter to Congress. SIA, 2015. (Available at: http://cdn2.hubspot.net/hubfs/409470/documents/SIA_trade_secrets_letter_oct_2015.docx.pdf) 9 Public Comments Submitted by Intel Corporation re “Notice of Action and Request for Public Comments on Negotiating Objectives for a U.S.-Japan Trade Agreement.” November 26, 2018. 10 Standards concerning the availability, scope and use of Intellectual Property Rights. WTO. (Available at: https://www.wto.org/english/docs_e/legal_e/27-trips_04c_e.htm)

B. TRIPS PROVIDES UNIQUE LEGAL RIGHTS FOR IC LAYOUT DESIGNS

A. TRIPS IS THE FIRST INTERNATIONAL TRADE AGREEMENT TO PROVIDE PROTECTION FOR TRADE SECRETS

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semiconductor layout designs with the Semiconductor Chip Protection Act (1984). 11 Other countries

soon followed suit with individual legislation, and in 1989 the “Washington Treaty on Intellectual

Property in Respect of Integrated Circuits” (“Washington Treaty” or “IPIC Treaty”) was signed, but never

ratified.12 It wasn’t until the TRIPS Agreement that protection for chip layout designs was afforded on a

broader global scale.

This protection became increasingly important through the 1990s and 2000s when improvements in

automated design tools enabled semiconductor layout designs to be copied from protected layout design

with virtually no intellectual effort. While TRIPS includes a specific exception for copies made in the

course of reverse engineering, the implicit assumption for this exception was that reverse engineering

would require intellectual effort. In 2004 and 2006, the World Semiconductor Council (WSC) – an

international forum comprised of the semiconductor industries in China, Chinese Taipei, EU, Japan,

Korea and the US- advocated that courts and IP policymakers carefully review the existence of

intellectual effort, the use of improved automated design tools, and similarity (rather than identicality)

to an original protected layout design when adjudicating infringement claims under TRIPS and national

layout design protection laws.13

While IC layout protection was very important to the industry for several decades, advances in

semiconductor technology make other kinds of trade secrets a more valuable and practical route of IP

protection today. Thus, there is a strong need to develop new and stronger multilateral rules to

strengthen trade secret protection.

Article 31 of the TRIPS Agreement governs “compulsory licensing,” a practice in

which a government compels a patent holder to allow another entity to produce and

sell its patented product or process which is an exception to typical patent

protection rights. 14 While TRIPS allows compulsory licensing, it establishes a

number of procedural and substantive safeguards designed to prevent governments

from abusing compulsory licensing to enable or create more competitors, or to

restrict trade. Specifically, TRIPS (i) only allows compulsory licensing of patents on

a case-by-case basis (not by rule or general guideline); (ii) first requires an effort obtain authorization

from the patent-holder on reasonable commercial terms within a reasonable time-frame; and (iii) (and

only after section (ii) fails) limits substantive grounds for applying compulsory licensing to national

emergencies, other “circumstances of extreme urgency” or in cases of “public non-commercial use.”

Critically, TRIPS Article 31(c) provides further protection from compulsory licensing for

semiconductor technology: “in the case of semiconductor technology [compulsory licensing] shall only

11 Kasch, Steven. “The Semiconductor Chip Protection Act: Past, Present and Future.” High Technology Law Journal, Vol. 7, No 1 (Spring 1992). 12 Treaty on Intellectual Property in Respect of Integrated Circuits. World Intellectual Property Organization, 1989. (Available at: https://wipolex.wipo.int/en/text/294976) 13 WSC Statement on the Application of Layout Design Laws to Copying of Protected Layout Designs Using Improved Automated Design Tools. World Semiconductor Council, 2006. (Available as Annex to 2007 WSC Joint Statement: http://www.semiconductorcouncil.org/wp-content/uploads/2016/07/geneva.pdf) 14 Patents bestow exclusive rights on their owners to prevent others from making, selling, using or importing a product or process.

C. TRIPS SAFEGUARDS AGAINST COMPULSORY LICENSING OF SEMICONDUCTORS

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be for public non-commercial use or to remedy a practice determined after judicial or administrative

process to be anti-competitive.” The important and limiting term “public non-commercial use” means

that semiconductor innovators are only subject to compulsory licensing in situations of use by the

government itself or a government contractor (creating semiconductors solely for government use of the

chips or a product only procured by the government), and thus cannot compel a company to transfer

valuable intellectual property to indigenous competitors.

This international rule has been critical in confronting countries that are pursuing liberal compulsory

licensing policies to increase their access to foreign IP in 1) areas where access is deemed to be in the

“public interest” (i.e. pharmaceutical, biomedical, and environmental technologies; and 2) critical

technologies owned by “dominant” companies where access by smaller competitors is allegedly needed

to compete. TRIPS obligations also specifically limit compulsory licensing to very narrow circumstances,

so as to incentivize successful companies to continue to invest and innovate. Without specific guidance

and narrow provisions under which innovations could be subject to compulsory license, major research

and development enterprises would be reluctant to make the necessary investments to develop their

most valuable innovations.

Over 80 industry associations representing both high and low-tech companies

from around the world have declared the Information Technology Agreement

(ITA) to be one of the most meaningful and successful trade agreements in the

history of the World Trade Organization.15 Originally signed in 1996, the ITA and

its expansion (ITA-E) in 2015 eliminated tariffs on approximately $3 trillion of

information communication technology (ICT) goods traded globally every

year.16 The signatories of the ITA and ITA-E, which account for more than 97 percent of trade in these

products, agreed to eliminate tariffs on the covered products on a reciprocal basis. The 2015 expansion

rendered annual global tariff savings of $13.8 billion – without accounting for increased economic

activity.17

The semiconductor industry is perhaps the greatest beneficiary of the ITA and its expansion.

Semiconductors are the largest ITA product category, accounting for 32 percent of global trade of ITA

products in 2015. 18 The ITA expansion resolved non-uniform tariff classification of advanced

semiconductors known as multi-component ICs (MCOs), which before 2015 were typically classified as

parts of other equipment rather than as a semiconductor and subject to tariffs as high as 25 percent.

Elimination of tariffs on MCOs alone provides roughly $150-300 million a year in tariff savings for U.S.

15 Global Industry Statement of Support for Expansion of the Information Technology Agreement. October 2012. 16 The 1996 Agreement eliminated tariffs on $1.7 trillion of goods, and the 2015 ITA expansion covered an additional $1.3 trillion. “20 Years of the WTO,” WTO Publication, 2017 17 Trade in ICT – An Important Pillar for Economic Growth and Prosperity. BDI, 2019. (Available at: https://english.bdi.eu/article/news/trade-in-ict-an-important-pillar-for-economic-growth-and-prosperity/) 18 20 Years of the WTO. WTO, 2017. (Available at: https://www.wto.org/english/res_e/publications_e/ita20years2017_e.htm)

II. ITA AND ITA EXPANSION HAS ACCELERATED ICT DEMAND, LOWERED CONSUMER PRICES, AND STRENGTHENED THE SEMICONDUCTOR ECOSYSTEM

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companies. 19 Yet the most significant benefit to the semiconductor industry is the growth in global

demand for semiconductor-enabled ICT products accelerated by the pioneering trade pact. Tariff

elimination “decreases the cost of innovation-and productivity-enhancing ICT capital goods, which spurs

their adoption and consumption among businesses and consumers alike.”20 Between 1996 and 2015,

world exports of ICT products covered by the ITA tripled to $1.7 trillion. This is especially significant

considering that the price of ICT products has also declined dramatically during the same period. The

U.S. Bureau of Labor and Statistics estimates that the import price level for “computers, peripherals and

semiconductors” has dropped 96 percent between 1996 and 2015. 21 The increased demand for ICT

products driven by lower costs and greater technology diffusion has boosted demand for

semiconductors. Between 2015 and 2018, global semiconductor sales have jumped from about $330

billion to $468 billion.22

EXAMPLES OF PRODUCTS COVERED UNDER ITA & ITA EXPANSION

ITA (1996) ITA EXPANSION (2015)

computers and peripheral equipment

electronic devices (TV-cameras, video recording, digital car radios, set top

boxes)

medical equipment (scanners, magnetic resonance imaging, dental

care, and ophthalmology) electrical components such as semiconductors

video games and consoles loudspeakers, microphones, and headphones

computer software audiovisual/multimedia (GPS, DVD players, Smart cards, optical media)

telecommunication satellites

telecommunications equipment

multifunctional printing and copying machines, ink cartridges

parts for producing IT goods and semiconductors (lasers, LEDs, touchscreens, etc.)

analytical instruments

multicomponent integrated circuits (MCOs) and multi-chip packages (MCPs)

machine tools to manufacture printed circuits, semiconductors, and other IT

products

The “zero-in, zero-out” trading environment has been a huge boon to intermediate products like

semiconductors, which have complex global production chains. A typical semiconductor crosses borders

multiple times throughout its production cycle and before its eventual integration into an end-product.

A tariff-free environment eliminates not just the tariff, but also the costly, burdensome and often time-

consuming administrative customs procedures for goods crossing borders. Thus, the ITA has also greatly

strengthened the semiconductor ecosystem and all the players in it, including designers, manufacturers,

assembly and test operations, downstream electronics industries, and customers.

19 The Benefits of Including Multi-Component Semiconductors in an Expanded Information Technology Agreement. SIA, 2014. (Available at: https://www.semiconductors.org/the-benefits-of-including-multi-component-semiconductors-in-an-expanded-information-technology-agreement/) 20 Assessing the Benefits of Full ITA Participation for Indonesia, Laos, Sri Lanka, and Vietnam. Information Technology and Innovation Foundation, 2017. (Available at: https://itif.org/publications/2017/09/28/assessing-benefits-full-ita-participation-indonesia-laos-sri-lanka-and) 21 Long-term price trends for computers, TVs, and related items. U.S. Bureau of Labor Statistics, 2015. (Available at: https://www.bls.gov/opub/ted/2015/long-term-price-trends-for-computers-tvs-and-related-items.htm) 22 2020 State of the U.S. Semiconductor Industry. SIA, 2020. (Available at: https://www.semiconductors.org/2020-state-of-the-u-s-semiconductor-industry/)

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By lowering the cost of semiconductors and enabling greater ICT trade, the ITA has been a win-win-win

for countries, companies, and consumers. For countries, it promotes more affordable ICT infrastructure

and greater connectivity, spurs economic growth and productivity, and increases employment,

investment and export opportunities. For companies, it increases efficiency and allows companies to

channel funds that otherwise would have been spent on tariffs into R&D for future innovations.

Semiconductor companies on average re-invest one-fifth of sales revenues back into R&D, the second-

highest rate of research investment of any industry. For consumers, it has lowered prices of key

consumer goods, and increased access to life-changing technologies in areas such as

telecommunications, computing, energy efficiency, transportation, health care, medical technology,

artificial intelligence, automation, and more.

McKinsey & Company has reported that if the automobile industry had similar improvements in price

and performance to semiconductors over three decades, “a Rolls-Royce would cost only US $40 and could

circle the globe eight times on one gallon of gas - with a top speed of 2.4 million miles per hour.”23 The

ability to access and freely move products, talent, materials, resources and knowledge across borders

has been a key driver of this extraordinary growth and cost reduction.

25 YEARS OF SEMICONDUCTOR INDUSTRY ADVANCEMENT 24

Semiconductor Growth Metric 1996 2019 % Change

Total Semiconductor Trade1 $294 billion* $1.655 trillion* 463%

Cell phone subscriptions per 100 people2 3.022* 104.9* 3,371%

Internet users per 100 people3 1.19* 49.7* 4,076%

Size of Global Semiconductor Market4 $132 billion $412 billion 212%

Total Number of Semiconductor Units Produced5

215 billion 932 billion 333%

Number of Transistors Produced (estimate)6 29.1 quadrillion

(29.1 x 1014)

262 sextillion (2.62 x 1021)

900,343,543%

Average Number of Transistors per Semiconductor7

135,237 2,809,901,908 2,077,661%

PC Processor Speeds8 133 MHz

Single Core 2,300 MHz Quad Core

1,629%

Total Worldwide IC Wafer Capacity (200 mm equivalents)9

Source:

51.9 million 230.5 million 344%

Worldwide Semiconductor Industry R&D Spending10

$15.7 billion $64.5 billion 311%

Process Technology Node Reached11

350 nanometers (0.35 microns)

7 nanometers -98%

Average Semiconductor Content per Electronic System12 18.8% 26.3% 40%

23 Creating Value in the Semiconductor Industry. McKinsey on Semiconductors, Autumn 2011. (Available at: https://www.mckinsey.com/~/media/McKinsey/dotcom/client_service/Semiconductors/PDFs/MOSC_1_Value_creation.ashx) 24 Note: Value amounts ($) expressed in US dollars.

Sources: 1. UN Comtrade (excl. LED) 2. World Bank, ITU 3. World Bank, ITU 4. WSTS 5. WSTS 6. SIA 7. SIA & WSTS 8. IC Insights,

McClean Report 2020 9. IC Insights, McClean Report 2020 10. IC Insights, McClean Report 2020 11. IC Insights, McClean Report 2020

12. IC Insights, McClean Report 2020 *Where 1996/2019 data is not available, estimates are based on most recent year available

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The Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) was

designed to address trade distorting subsidies that governments use to give their

firms an unfair competitive advantage. Because of the semiconductor industry’s high

capital and innovation costs, government investment has been a prominent

contributor to the development of semiconductor production since the early days of

the industry. However, while market-based government support can help fuel

innovation and technological diffusion, non-transparent and discriminatory subsidies can lead to unfair

competitive conditions and create major market distortions. While government subsidies continue to

present major challenges in the trading system, the SCM Agreement represents an important first step

toward establishing rules and enforcement tools intended to curb market-distorting subsidies so that

the competitiveness of companies and their products, not government intervention, is the principle

driver of industry success.

Specifically, the SCM Agreement has played an important role in defining and differentiating between

appropriate and inappropriate government support for industry. The original 1995 agreement

prohibited two types of blatantly discriminatory subsidies: export promotion and import substitution

(i.e. use of domestic products). Additionally, the agreement allowed members to take countervailing duty

(CVD) actions against subsidies that cause “material injury” to their own domestic industry (“actionable

subsidies”), and it established rules and procedures allowing WTO members to challenge trade-

distorting domestic subsidies that cause “adverse effects.” Lastly, the original agreement permitted

subsidies in certain areas like R&D activity (“non-actionable subsidies”).25 Part VII of the SCM Agreement

also obliges members to notify other members of all specific subsidies granted or maintained within their

territories. This notification mechanism was intended to introduce greater transparency to government

support to allow other members to evaluate the trade effects and understand the operation of subsidy

programs.

The WTO rules on prohibited export and import substitution subsidies has been reasonably effective. In

fact, the first WTO case filed against China involved import substitution in the semiconductor industry.

In 2004, the US government successfully challenged a major Chinese tax subsidy contingent on local ICT

production. As a result of the WTO challenge, China agreed to cease granting a discriminatory VAT rebate

amounting to 14 to 17 percentage points that was granted to only to domestic semiconductors. The U.S.

government has also successful challenged a wide array of other prohibited subsidies provided by China

and other countries.26

It has become apparent, however, that the SCM disciplines regarding trade-distorting domestic subsidies

are limited in effect and have failed to account for different economic systems that blur the lines between

25 See WTO Agreement on Subsidies and Countervailing Measures, WTO. The “non-actionable” subsidy provision expired in 1999. See here for a sampling of such cases: 26 See here for a sampling of such cases: https://ustr.gov/about-us/policy-offices/press-office/press-releases/archives/2007/february/united-states-files-wto-caseagainst-chi and https://ustr.gov/about-us/policy-offices/press-office/press-releases/2015/february/united-states-launches-challenge and https://ustr.gov/about-us/policyoffices/press-office/press-releases/2016/april/chinese-export-subsidies-under

III. AGREEMENT ON SUSBIDIES AND COUNTERVAILING MEASURES WAS A SIGNIFICANT STEP TOWARD FAIR, MARKET-BASED COMPETITION AMONG COMPANIES

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public and private funding. For example, most foreign subsidies for semiconductors are being provided

by state-owned banks or government-guided investment funds that may not possess “government

authority” or perform a “government function,” but are directly or indirectly controlled by the

government through minority or majority ownership interests. The current WTO rules are undermined

by the lack of clear guidance on the definitions of what constitutes a “public body,” the need to prove

“adverse effects,” the lack of rules that effectively discipline subsidies that may create excess capacity

and third-country market displacement, and lack of enforcement of the transparency and notification

obligations. Stronger rules are needed to avoid the harmful effects of non-market and non-transparent

government support in the semiconductor sector that discriminates against foreign competitors,

generates excess capacity or distorts trade.

Semiconductors are a highly traded product that have a complex manufacturing

supply chain. Overly complicated customs and trade procedures, obligations and

practices have the potential to significantly disrupt semiconductor supply chains,

creating costly impediments that impair companies and consumers. The 2017

ratification of the WTO’s Trade Facilitation Agreement (TFA) is lauded by the global

semiconductor industry for lowering trade costs as goods move across borders by 1) expediting import,

export and in-country transit; 2) removing bureaucratic red tape and corruption; 3), making border

processes more efficient and transparent; and 4) focusing on technological advances to achieve such

objectives. 27 The WTO estimates that removing burdensome regulations and simplifying customs

27 Trade Facilitation. WTO. (Available at: https://www.wto.org/english/tratop_e/tradfa_e/tradfa_e.htm)

IV. TFA HAS LOWERED COSTS OF SEMICONDUCTOR TRADE

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processes lowers trade costs by the equivalent of a 134 percent ad valorem tariff.28 Critically, because

82 percent of U.S. semiconductor sales are to overseas customers and semiconductors are the fifth

largest U.S. export, the U.S. directly benefits from the TFA’s lowering of international barriers to trade.29

The Agreement on Technical Barriers to Trade (TBT) aims to ensure that technical regulations, standards

and conformity assessment procedures are non-discriminatory and do not create unnecessary obstacles

to trade. This agreement has been incredibly important to the semiconductor industry, and to the

information and communications technology (ICT) industry more broadly, in promoting global

standards and interoperability. Interoperability is a basic requirement for the widespread, global

adoption of U.S. technology products. There are many barriers to interoperability, including unique

country standards, technology mandates, discriminatory regulations, and burdensome conformity

assessment procedures. The TBT agreement has been critical in promoting global interoperability by

prohibiting policies and technical measures that discriminate between foreign and domestic products or

create “unnecessary” obstacles to trade, as well as by requiring the use of international standards over

unique domestic standards as the basis for technical regulations, except in narrow circumstances. The

TBT Agreement’s transparency provisions regarding consultation and notice also has helped create a

more predictable trading environment. The TBT Agreement Code of Good Practice requires, among other

things, notification to the public and to the WTO TBT Committee of any and all technical measures that

may have a significant effect on trade, and a 60-day comment period and mandatory reply to all

comments received by domestic and international stakeholders.

Despite its many benefits over the past 25 years, the WTO has many areas in need of

reform and improvement to combat discriminatory and market-distorting practices in

the ICT sector. Current global trade tensions underscore the importance of establishing

more robust global fair trade disciplines that protect and strengthen the semiconductor industry and the

broader global economy. Examples of areas in which the semiconductor industry could benefit from

stronger and modernized global trade rules can be found below. These reforms should be advocated on

multiple fronts including the WTO, regional trade blocs, as well as bilateral agreements.

1. STRENGTHEN LEGAL PROTECTIONS TO ENHANCE TRADE SECRETS PROTECTION

Trade secrets are a critical and major asset for nearly all semiconductor companies. Yet despite their

tremendous importance and the inclusion of certain protections in TRIPS, trade secrets remain

extremely vulnerable, especially in jurisdictions with weak laws and/or enforcement practices. More

problematic is the wholesale misappropriation of trade secrets enabled or encouraged as result of

28 Trade facilitation — Cutting “red tape” at the border. WTO. (Available at: https://www.wto.org/english/tratop_e/tradfa_e/tradfa_introduction_e.htm) 29 2020 State of the U.S. Semiconductor Industry. SIA, 2020. (Available at: https://www.semiconductors.org/2020-state-of-the-u-s-semiconductor-industry/, p. 3)

VI. WTO REFORMS AND MODERNIZED TRADE RULES WILL FURTHER ENHANCE BENEFITS OF GLOBAL TRADE

V. TBT AGREEMENT HAS PROMOTED GLOBAL INTEROPERABILITY

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government industrial policy. Modern trade agreements should require criminal penalties for trade

secret theft, including theft by governments or theft by means of cyber intrusion, and strengthened

procedures to protect trade secrets during conformity assessment procedures, such as banning forced

disclosure of software source code or other sensitive IP in certification/regulatory schemes.

2. STRENGTHEN SUBSIDY & SOE DISCIPLINES SO COMPANIES CAN COMPETE FAIRLY BASED ON MARKET CONSIDERATIONS

The efforts by some governments to provide unprecedented levels of subsidization to develop their

domestic semiconductor capabilities has the potential to seriously distort semiconductor markets and

generate excess capacity and dumping. WTO disciplines on subsidies and state-owned enterprises

(SOEs) should be strengthened to ensure that the competitiveness of companies and their products, not

government intervention, is the principal driver of industry success. Key areas of subsidy reform should

include:

1) Restoring the “dark amber” category for certain types of highly trade-distorting domestic subsidies that are deemed to cause “serious prejudice” under SCM Article 6;

2) Improving enforcement by establishing a presumption of serious prejudice for programs that governments fail to notify;

3) Addressing subsidies provided by and to SOEs by defining “public body” based on an objective control standard;

4) Expanding prohibited assistance (non-commercial assistance) to more effectively capture

government assistance that creates excess capacity or leads to market displacement;30 and 5) Clarifying the provisions of the SCM Agreement in Footnote 13 regarding “threat” of serious

prejudice to cover situations in which government subsidies are likely to cause future adverse effects or future injury to a targeted industry.

3. PREVENT FORCED LOCALIZATION OF DIGITAL INFRASTRUCTURE & FORCED TECHNOLOGY TRANSFERS

Governments are increasingly using “forced localization” tactics to unfairly advantage domestic

companies and/or force foreign investors to use domestic technology, transfer their own technology,

localize data storage and processing, or build expensive infrastructure in a region as a condition of

market access. These rules raise costs, distort markets, reduce global interoperability, increase the risk

of unauthorized disclosure or theft of IP, and represent a thinly disguised form of import substitution,

which is already prohibited by WTO rules. Establishing new trade rules that prevent WTO members from

requiring companies to build technology infrastructure in their market or requiring companies to

purchase or use local technology will help ensure fair trade, data efficiency, cost efficiency, global

interoperability and technology choice.

4. ENSURE MARKET ACCESS FOR INNOVATIVE ENCRYPTION PRODUCTS

With semiconductor-enabled encryption now used in nearly all commonly used and globally traded ICT

products, the adoption of restrictive policies (i.e. import bans, technology mandates or requirements to

transfer or provide access to proprietary information) would erect a major market access barrier and

30 As reported by the WTO’s Working Party on the Ascension of China, China’s WTO ascension agreement requires any business “decisions by state-owned and state-invested enterprises had to be based on commercial considerations as provided in the WTO Agreement.” (Available at: https://www.wto.org/english/thewto_e/acc_e/wp_acc_china_e.doc, p. 9)

13

threaten the exportation of semiconductors and other ICT products on the scale of hundreds of billions

of dollars. WTO negotiators should agree on new rules that prevent countries from taking actions that

block or place discriminatory restrictions on commercial foreign products with encryption, or that block

companies from using the strongest available security technologies in the marketplace.

5. ELIMINATE DUTIES ON SEMICONDUCTOR-RICH PRODUCTS, ELECTRONIC TRANSMISSIONS

Reciprocal duty-free treatment for both tangible and intangible ICT goods has lowered consumer prices,

facilitated trade, and spurred demand for ICT and digital products, to the benefit of goods and services

exporters of all sizes. To further enhance these benefits and promote technology innovation and

adoption, all WTO members should be encouraged to join both the ITA and ITA expansion and make

permanent the WTO’s existing moratorium on the imposition of customs duties on trade in electronic

transmissions.

The steady opening of markets, leveling of the global playing field, and establishment of multilateral

disciplines on IP, subsidies, and other government policies spearheaded by the General Agreement on

Tariffs and Trade (GATT) and World Trade Organization (WTO) over the past 25 years have been critical

to the success of the global semiconductor industry. Landmark agreements, such as TRIPS, ITA, SCM, and

TFA have also broken down protectionist barriers and allowed semiconductor companies to expand

their businesses and reach new markets without fear of losing their hard-won innovations. Certainly,

discriminatory and market-distorting practices persist in the ICT sector and beyond that need to be

addressed. However, governments can best tackle these challenges by strengthening the WTO’s

negotiating function and updating global trade rules to ensure relevance for modern trade issues. As one

of the world’s most widely traded products, semiconductors can best continue powering the world’s

economy and employing workers if we ensure the global marketplace is free, open, and fair to all.31

31 Semiconductor Devices. OEC. (Available at: https://oec.world/en/profile/hs92/semiconductor-devices#:~:text=Semiconductor%20Devices%20are%20the%20world's,and%20Malaysia%20(%246.59B))

VI. CONCLUSION